Conflicts of Interest

Conflicts of Interest

By Robert B. Davidson, Esq., Arbitrator and Mediator
The FAA sets the rule that an arbitration award may
be vacated “where there was evident partiality or
corruption in the arbitrators.” 9 U.S.C. Sec. 10(a)
(2). We know from Commonwealth Coatings Corp.
v. Continental Cas. Co., 393 U.S. 145, 89 S.Ct. 337,
21 L.E.2d 301 (1968), as reaffirmed by Positive
Software Solutions v. New Century Mortgage Corp.,
476 F.3d 278 (5th Cir. 2007)
1
, that “evident partial-
ity” as used in Section 10(a)(2) means something
more than a mere “appearance of bias”—at least
everywhere but the Ninth Circuit. See Schmitz v.
Zilveti, 20 F.3d 1043 (9th Cir. 1994). We also know
that the failure of an arbitrator to make a material
disclosure may lead to vacatur of an award on the
grounds articulated in Section 10(a)(2). It is left to
judges applying the standards, however, to define
when an arbitrator’s failure to disclose may lead to
the conclusion that there was, indeed, “evident par-
tiality.”
The case law gives at least some guidance on what
should be disclosed and how courts treat a failure
to disclose. In the non-disclosure area, the seminal
case, Commonwealth Coatings, supra, involved an
arbitrator who, over a period of four to five years,
ending about a year prior to the arbitration, received
about $12,000 from one of the parties for legal work
that included the rendering of services on the very
projects involved in the arbitration before him. The
award in that case was vacated for the arbitrator’s
“evident partiality.” In Positive Software, the arbitra-
tor and an attorney for one of the parties had been
two of 34 lawyers who had previously represented
the same client seven years earlier in unrelated
litigation. That prior litigation involved six different
lawsuits in the early 1990s and the common client
(Intel) was at the time represented by seven law
firms. Although the arbitrator’s name and the attor -
ney’s name appeared on the pleadings in one of the
cases, they “never attended or participated in any
meetings, telephone calls, hearings, depositions or
trials together.” Id. at 280. In reversing the decision
of the prior panel, the Fifth Circuit, en banc, dis-
cussed the standard to be applied and concluded,
over a vigorous dissent, that Commonwealth Coat-
ings required the application of a standard that was
more than an “appearance of bias.” To the same ef-
fect, see Morelite Contr. Corp. v. New York City Dist.
Council, 748 F .2d 79, 83-84 (2d Cir. 1984) (“Mindful
of the trade-off between expertise and impartiality,
and cognizant of the voluntary nature of submitting
to arbitration, we read Section 10(b) as requiring a
showing of something more than the mere ‘appear-
ance of bias’ to vacate an arbitration award. To do
otherwise would be to render this efficient means
of dispute resolution ineffective in many commercial
settings.”)
Other fact scenarios emphasize the need for an arbi-
trator to make non-trivial disclosures and to be sure
that he or she makes a continuing effort to inform
himself or herself of relevant information. Thus, in
Soma Partners v. Northwest Biotherapeutics, 41
A.D.3d 257, 838 N.Y.S.2d 519, 2007 WL 1746391
(1st Dep’t 2007), the court vacated an arbitration
award when the arbitrator failed to disclose that one
1.800.352.JAMS | www.jamsadr.com
This article was originally published in Just Resolutions
and is reprinted with their permission.
ConfliCts of
interest
what are they, and must
they all be disClosed?Conflicts of Interest | Page 2
of his colleagues at the law firm (an “of counsel”),
through his service as a member of the board of
directors of a company called Tedco, knew a wit-
ness—a Mr. Powers—listed by one of the parties.
Tedco had contractual and investment relationships
with another company named Toucan Capital Corp.
(“Toucan”). The arbitration involved a dispute over
whether one of the parties was entitled to a finder’s
fee by reason of an investment made by Toucan.
In Soma Partners, the court applied the New York
State standard for vacatur under CPLR 7511(b)
(1)(ii) which permits vacatur on the ground of “the
partiality of an arbitrator appointed as a neutral.” A
critical fact in Soma Partners was that the arbitra-
tor circulated the AAA’s conflicts list at his law firm
and learned that his colleague knew Powers prior
to the arbitrator’s own clean disclosure and his ac-
ceptance of the appointment. In vacating the award,
the court explained that the matter of an arbitrator’s
impartiality is best left to the parties, but “[t]his can
only be achieved if, prior to the commencement of
the arbitration, the arbitrator discloses to the parties
all facts which might reasonably cause one of them
to ask for disqualification...” Id. at 520. The court
concluded:
The connection between the arbitrator and Tou-
can and Powers [the witness] was not so insig-
nificant that he could dispense with disclosure,
and therefore the arbitration award must be va-
cated and a new arbitration conducted.
Id. at 521.
One might draw the conclusion from Soma Part-
ners that it’s better not to ask for information. If the
arbitrator there did not know of the situation, then
his failure to disclose might have been considered
in a different light. However, in Applied Industrial
Materials Corp. v. Ovalar Makine Ticaret Ve Sanayi,
492 F.3d 132 (2d Cir. 2007), the arbitrator, the CEO
of a large corporation, learned during the course of
the arbitration that one of his company’s subsidiar-
ies did business with the company that was acquir-
ing the plaintiff. The arbitrator disclosed the conflict
to the parties but failed to disclose that he had set
up an internal firewall that effectively prevented him
from learning anything further about the conflict. He
did not disclose his decision to set up the firewall.
As it turned out, there was more to disclose (which
he never learned about). In affirming the district
court’s refusal to confirm the award, the Second
Circuit held that there was evident partiality in the
arbitrator because he neither investigated a con-
flict of which he had become aware, nor disclosed
his decision not to investigate further. As the court
expressed the rule:
It therefore follows that where an arbitrator has
reason to believe that a nontrivial conflict of in-
terest might exist, he must (1) investigate the
conflict (which may reveal information that must
be disclosed under Commonwealth Coatings) or
(2) disclose his reasons for believing there might
be a conflict and his intention not to investigate...
We emphasize that we are not creating a free-
standing duty to investigate. The mere failure to
investigate is not, by itself, sufficient to vacate an
arbitration award. But, when an arbitrator knows
of a potential conflict, a failure to either investi-
gate or disclose an intention not to investigate is
indicative of evident partiality.
Ovalar, 492 F.3d at 138 (emphasis in original).
The lesson in Ovalar is that an arbitrator would be
well-advised to make an investigation, learn the
facts and disclose them if need be. If the arbitra-
tor becomes aware of a potential conflict, and then
puts his or her head in the sand for the remainder
of the case, he or she would also be well-advised to
tell the parties that he or she is doing so—and even
that might not be good enough. Mere ignorance of a
subsequently arising conflict will not suffice.
The district court in Ovalar relied in part on Canon
II of the Code of Ethics for Arbitrators in Commer-
cial Disputes, effective March 1, 2004
2
. Canon II
provides under the heading “An Arbitrator Should
Disclose Any Interest or Relationship Likely to Affect
Impartiality or Which Might Create an Appearance
of Partiality”
3
:
C. The obligation to disclose interests or relation-
ships described in paragraph A is a continuing
duty which requires a person who accepts ap-
pointment as an arbitrator to disclose, as soon
as practicable, at any stage of the arbitration,
any such interests or relationships which may
arise, or which are recalled or discovered.Conflicts of Interest | Page 3
A recent instructive case comes out of a Texas ap-
pellate court. Alim v. KBR, 331 S.W.3d 178 (Tex.
App. 2011) was an employment case. There, the
arbitrator failed to disclose that the employer’s party
representative had previously appeared before him
as a party representative of a related entity in anoth-
er case. In vacating the award, the Texas court ruled
that “A neutral arbitrator exhibits evident partiality
if he does not disclose facts that might, to an ob-
jective observer, create a reasonable impression of
the arbitrator’s partiality” citing Burlington N.R.R. v.
TUCO, Inc. 960 S.W.2d 629, 636 (Tex. 1997). Alim
at 181. In Alim, the arbitrator answered “No” to the
following question: “Have any of the party represen-
tatives, law firms or parties appeared before you in
past arbitration cases?” Id at 180. After making that
disclosure, and prior to the start of the hearings, the
arbitrator supplemented the disclosure as follows: “I
have over the years come across Ms. Ungerman and
Mr. Graves [the party representative], but in terms of
this case, I have absolutely no interest involving Hal-
liburton or-or anything else....” Id. That additional
statement was deemed insufficient to alert the par -
ties that Graves had indeed appeared before the ar-
bitrator in past cases and that the arbitrator’s prior
disclosure was, therefore, inaccurate.
In vacating the award, the appellate court quoted
the Texas Supreme Court in TUCO that “evident
partiality is established from the nondisclosure itself,
regardless of whether the nondisclosed information
necessarily establishes partiality or bias.” TUCO,
960 S.W.2d at 636.
In a recent decision, however, the Second Circuit
embraced a less rigid standard. There, the panel
reversed the district court’s vacatur of an award
notwithstanding the fact that two of the three arbi-
trators failed to disclose their simultaneous service
in a subsequently filed arbitration that had a com-
mon witness and issues that were arguably similar
to those they were hearing in the first case.
In Scandinavian Reinsurance Co. Ltd. v. Saint Paul
Fire and Marine Ins. Co, Docket No. 10-0910-CV
(2d Cir. February 3, 2012), the Second Circuit re-
versed District Judge Scheindlin’s vacatur of an ar-
bitration award. As the Court framed the issue (Op.
at 2):
The primary question presented on this appeal
is whether the failure of two arbitrators to dis-
close their concurrent service as arbitrators in
another, arguably similar, arbitration constitutes
“evident partiality” within the meaning of the
[FAA Sec. 10(a)(2)].
4
The facts are instructive. In the St. Paul arbitration,
St. Paul had ceded certain of its reinsurance liabili-
ties to Scandanavian. A dispute arose over whether
those liabilities were capped in some fashion and
whether three experience accounts or only one were
contemplated by the parties’ retrocessional agree-
ment. St. Paul appointed Gentile as its arbitrator.
Gentile and Scandanavian’s party-appointed arbi-
trator selected Dessenko as the Chair. Both made
disclosures with Dessenko completing a nine-page
questionnaire. Included in his responses was “that
he had never had any involvement with the subject
matter of the dispute, nor did he have any signifi-
cant professional or personal relationship with any
officers, directors, or employees of the parties.” Op.
at 9. Dessenko also acknowledged “the arbitrators’
‘ongoing responsibility’ to make disclosure if and
when they ‘become aware of relationships or situa-
tions that require additional disclosure.’” Op. at 10.
Dessenko, in compliance with that statement, in
fact made supplemental disclosures in the course
of the arbitration although none relating to his later
service on a panel with Gentile.
After the St. Paul arbitration had begun, a second
arbitration (“the Platinum arbitration”) began. In the
Platinum arbitration, one of the parties (Platinum)
appointed Gentile. Again, the two party-appointed
arbitrators selected Dessenko as the Chair. The Plat-
inum arbitration ended prior to the conclusion of the
St. Paul arbitration.
Neither Dessenko nor Gentile ever disclosed to the
parties in the St. Paul arbitration their concurrent
service in the Platinum arbitration, even though they
did disclose to the parties in the Platinum arbitra-
tion the fact “that they were then serving together
as arbitrators in another matter.” Op. at 14. More-
over, certain issues in the Platinum arbitration were
arguably related to those being decided in the St.
Paul arbitration. One of those related to the opera-Conflicts of Interest | Page 4
tion of experience accounts like those at issue in the
St. Paul arbitration. In addition, a witness named
Hedges, a past employee of both Scandanavian
and Platinum, testified in both proceedings. In va-
cating the award below, the district court observed
that Hedges’ testimony in the Platinum case could
be viewed as inconsistent with his testimony later
offered in the St. Paul arbitration thus conceivably
affecting his credibility in the St. Paul proceeding.
(Op. at 15-16). In deciding to reverse the district
court and confirm the award, the Second Circuit ex-
plained (Op. at 25):
The evident-partiality standard is, at its core, di-
rected to the question of bias. Because it was
“[not] the purpose of Congress to authorize liti-
gants to submit their cases and controversies”
to arbitrators who are “biased against one liti-
gant and favorable to another,” [citing Common-
welath Coatings] the FAA provides for vacatur of
arbitral awards whenever it is “evident” that an
arbitrator was “partial[ ]” to one of the litigating
parties. 9 U.S.C. Sec. 10(a)(2). It follows that
where an undisclosed matter is not suggestive
of bias, vacatur based upon that nondisclosure
cannot be warranted under an evident-partiality
theory.
As the Court further opined (Op. at 27):
[A]s a general matter, we do not think that
the fact that two arbitrators served together
in one arbitration at the same time that they
served together in another is, without more,
evidence that they were predisposed to favor
one party over another in either arbitration.
The undisclosed matter here was overlapping
arbitral service, not a “material relationship
with a party.” [citing Ovalar]
5
The St. Paul case is, quite arguably, a departure
from the case law trend evident in such decisions as
Soma Partners, Ovalar and TUCO, supra, where—
as explained in TUCO—“evident partiality is estab-
lished from the nondisclosure itself.” 960 S.W.2d at
636.
There are certain rules that arise from the above
cases. First, make all initial disclosures that, to an
objective observer, might create an impression of
partiality. Note that courts, as in Alim above, will
consider an arbitrator to have exhibited “evident
partiality” if he or she fails to make an initial disclo-
sure that arguably should have been made.
6
Sec-
ond, when you do make a disclosure, take care that
it is complete and wholly accurate. An inaccurate
or false disclosure will lead to special scrutiny as in
Soma Partners above. Third, do not seek to immu-
nize yourself from your continuing disclosure obliga-
tions by walling yourself off from possible sources
of conflict information. If you do wall yourself off,
at least be sure to disclose to the parties that you
are doing so and that it is possible that subsequent
events might lead to conflicts that will not come to
your attention and, therefore, that you will not be
able to disclose. Finally, take your obligation to make
ongoing disclosures seriously. While you might
“thread the needle” as the two arbitrators did in St.
Paul, you are tempting vacatur by failing to disclose
subsequent assignments involving the same parties,
arbitrators or issues that arguably relate to an ongo-
ing case.
Helpful CHeCklists Thankfully, the provider organizations give assis-
tance to potential arbitrators in the conflict checking
process. Both the AAA and JAMS have checklists
that potential arbitrators complete with questions
asking, for example, whether the candidate or his
or her family has a significant personal relationship
with a party or counsel for a party.
CPR has Model Rules for the Lawyer as Third-Party
Neutral. Rule 4.5.4 entitled “Conflicts of Interest”
provides specific guidance in the nature of the
JAMS and AAA questionnaires. In the international
arena the International Bar Association’s Guidelines
on Conflicts of Interest in International Arbitration
(known as the “IBA Guidelines”) are also quite help-
ful. They divide potential conflicts into three areas:
green (need not be disclosed); orange (need to be
disclosed but are waivable by the parties) and red
(non-waivable conflicts, although certain “red” con-
flicts are waivable). The IBA Guidelines’ general rule
on disclosure provides in General Principle 3:
(a) If facts or circumstances exist that may, in
the eyes of the parties, give rise to doubts as Conflicts of Interest | Page 5
to the arbitrator’s impartiality or independence,
the arbitration shall disclose such facts or cir-
cumstances to the parties, the arbitration insti-
tution or other appointing authority...and to the
co-arbitrators, if any, prior to accepting his or her
appointment or, if thereafter, as soon as he or
she learns about them.
* * *
(c) Any doubt as to whether an arbitrator should
disclose certain facts or circumstances should
be resolved in favour of disclosure.
There are also additional things that all potential
arbitrators can do to lessen the odds that they will
be accused of evident partiality after rendering an
award. One is to make a generic disclosure such as
the recent JAMS addition:
12. Do you participate in social networking sites
such as Facebook, Twitter, or LinkedIn?
If the arbitrator marked this question, “Yes,” it
is possible that one of the lawyers or member
of a law firm involved in this matter is in some
way connected to the Arbitrator through this
professional networking application. However,
none of these contacts rises to the level of a
prior business relationship that might cause a
person aware of the facts to reasonably entertain
a doubt that the arbitrator would be able to be
impartial, unless otherwise noted below.
Or, if you are retired from a law practice, something
like the following might be in order: “I retired from
the firm of XYZ on January 1, 2007. As a retired
partner, I no longer have access to the firm’s client
database and, therefore, cannot learn whether the
firm either currently represents, or may have rep-
resented (or acted adversely to), one or both of the
parties in the arbitration. I myself have had no per-
sonal contact with the parties and am completely
impartial and unbiased in the matter.” These gener-
ic disclosures should be sufficient to pass muster
under Commonwealth Coatings.
In sum, make all the disclosures that would lead a
reasonable objective observer to form an impression
that you might be partial or biased. In close cases
or, if uncertain, err on the side of disclosure but un-
derstand that trivial relationships (such as common
memberships in bar associations) need not be dis-
closed. Know as well that your disclosure obligations
are continuing ones and act accordingly. This is, in
the last analysis, an exercise in good judgment.
Robert B. Davidson is a full-time arbitrator and mediator of
domestic and international disputes and the Executive Director
of JAMS Arbitration Practice. Among other listings he is ranked
by Chambers USA as one of the country’s Leading International
Arbitrators and regularly arbitrates commercial disputes under
the auspices of all of the major arbitration institutions. He can
be reached at rdavidson@jamsadr.com.
1 Positive Software was an en banc decision of the Fifth Circuit that re-
versed a prior decision of one of its panels that had vacated an arbitration
award.
2 The Code may be accessed at http://www.adr.org/sp.asp?id=21958.
3 Note the Code’s use of the higher standard (an appearance of bias) that
was generally rejected by Commonwealth Coatings.
4 The arbitration was a New York Convention case, but, because hear-
ings were conducted in the United States, the FAA’s grounds for vacatur
overlapped with those in Article V of the Convention (See Zeiler v. Deitsch,
500 F.3d 157.164 (2d Cir. 2007)).
5 Apparently, St. Paul did not press the argument on appeal that Des-
senko’s favorable vote with Gentile in the St. Paul case might have been in
consideration for Gentile’s appointment of Dessenko as Chair in the Plati-
num arbitration. The Court, however, recognized that special considerations
might exist in the party-appointed context, but left any such discussion for
another day. (Op. at f. 21).
6 But see the statement in Fortas’s dissent in Commonwealth Coatings,
393 U.S. 145 at 154, “I agree that failure of an arbitrator to volunteer in-
formation about business dealings with one party will, prima facie, sup-
port a claim of partiality or bias. But where there is no suggestion that the
nondisclosure was calculated, and where the complaining party disclaims
any imputation of partiality, bias, or misconduct, the presumption clearly is
overcome.”

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